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Should Your Vendors Carry Contract Liability Coverage?

CONTRACTUAL LIABILITY INSURANCE

Contractual liability insurance has been automatically provided in commercial general liability policies for over twenty years. However, more frequently, insurers will selectively eliminate the provision/s in the standard CGL coverage form to eliminate coverage for the most common instance of contract liability: One party indemnifying another party for tort liability.

To help your organization avoid this pitfall, we briefly explain which section of the CGL coverage form you should inspect to ensure coverage has not been removed.

THE ISO CGL COVERAGE FORM CG 00 01 12 07

Section (I)(1)(a) deals with coverage for bodily injury and property damage liability. The form states that the insurer “will pay those sums that the insured becomes legally obligated to pay as damages because of “bodily injury” or “property damage” to which this insurance applies.”

However, in Exclusions (2)(b) the form states coverage does not apply to (“bodily injury” or “property damage” for which the insured is obligated to pay damages by reason of the assumption of liability in a contract or agreement.”) At first glance, this seems to exclude coverage for the situation we described above. Not so. There are several exceptions to this coverage exclusion. For our purposes, we will focus on the language stating that the exclusion does not apply to liability for damages assumed in an ‘insured contract.’

The coverage form goes on to define ‘insured contract’ in a way that includes “That part of any other contract or agreement pertaining to your business… under which you assume the tort liability of another to pay for “bodily injury” or “property damage to a third person…”

To put it another way, the Coverage Form begins by stating it will cover certain tort damages the insured is obligated to pay, but not if the insured assumed that liability in a contract, UNLESS the insured assumed the liability in an “insurance contract.”

How does the insurer get around this? Simple, they just change the definition of “insurance contract” in the Definitions section of the Coverage Form so that it no longer actually provides you coverage.

The important section is the final paragraph, “f.” This paragraph states that an insured contract also means: “That part of any other contract or agreement pertaining to your business… under which you assume the tort liability of another to pay for “bodily injury” or “property damage to a third person…”

SECTION V – DEFINITIONS: (9)(f) is what bcs would advise you to inspect in the CGL CG 00 01 12 07 form your vendors submit. If paragraph (f) has been modified or deleted from how it appears above, you may have a problem. While this is certainly not a catch-all guarantee for knowing that your vendor indemnity provisions remain intact, it is a very good place to start.

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